Strategic

Bang & Olufsen Strategic Analysis 2011

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Introduction:

The aim of this report to analyse business environment consists of micro and macro

environment of Bang & Olufsen (B&O) a Danish company that manufacture and

designs an exclusive range of luxury products, which includes music systems,

loudspeakers, multimedia products and telephones with the combination of

technological excellence and emotional appeal (Admin, 2007). B&O products sold

over 100 countries by more than 1000 dealers in which more than 70% are exclusive

B1 stores (Olufsen, 2011). Company mainly focus on premium segment customers

who expect combination of exclusive quality and design with technological solutions.

B&O suffered 20% downfall in turnover in its main markets of Germany, Great

Britain and Denmark. Main reason of this downfall was, firstly, company was lacking

in new successful product launches and, Secondly, due to the financial crisis in year

2008. Previously, B&O use too get 25% (approx.) turnover from new product

launches which reduced to 10-16 percent since 2007. Technological transition

affected consumer electronics market as a result product life cycle shortened due to

rise in new technologies like high definition protocols for televisions. In august, 2008,

Karl Kristian (kalle) Hvidt Nielsen appointed as a new CEO for B&O who was CEO

for Bruel & Kjaer (a Danish microphones and electronics manufacturer) for six years.

Company announced new strategy with the appointment of new CEO, names as 'Pole

Position Strategy', the name taken from Formula One racing. This strategy enables

B&O to focus on its product range and profitability by clear goal and task for each

team member, a sense of urgency in organization.

Strategy is a word originated from military concept by Chinese Sage called Sun Tzu;

his book 'The Art of War' addresses strategy as a military tool. In today's business

environment, almost all businesses started developing strategies to gain competitive

advance. In a lay man term, strategy is a plan for future in present, after analysing past

with present.

There are many strategic frameworks which are used to evaluate strategy for both

internal and external analysis. This report used two strategic frameworks; Porter's five

forces for external business environment analysis and Value Chain for internal

environment analysis to evaluate B&O strategy. Careful and systematic analysis of

strategic tools helps organisation to develop competitive advantage over other

companies in the market.

External Analysis of Bang & Olufsen using Porter's Five Forces Model:

External environment is dynamic which keeps on changing that's why analysis of

external environment for any company is important and factor to analyse is both

diverse and complicated. External analysis helps organisation to examine threats and

opportunities that exists in the business environment. It is important for every

organisation to build up understanding of how changes in macro environment likely to

impact company. Porter's five forces framework helps to analyse competitive forces

in an industry in order to identify threats and opportunity confronting a company (Hill

& Jones, 2007).

Figure: Porter's Five Forces


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Source: SAY KENG LEE, KNOWLEDGE ADVENTURER & TECHNOLOGY

Competitive Rivalry Within An Industry

Competitive rivalry helps to identify the competition within the industry. B&O

operates in competitive market of high end audio/video businesses with high-end life

style goods segment. There are many suppliers in this competitive market like Sony,

Philips, and Samsung which provides various ranges of products to all type of

customers. In high end audio-video market, Bang and Olufsen has direct competition

with Loewe and Bose. Both companies manufacture high end luxury audio/video

products for premium segment customers, B&O get the competition from Loewe in

video products and from Bose in audio products. Television industry is completely

changed from analogue televisions to the bigger flat screens and high definitions with

the introduction of new technology. Flat screen television market is growing at very

fast because of popularity of bigger screen and high definition solutions. Due to the

increase in popularity, flat screen television becomes common good for every

household. Many companies entered in this market with cheap solutions which create

challenges for B&O to develop more innovative products by which customer can feel

the sense of 'magic' which use too be the strength of B&O.

The company's chief executive, Kalle Hvidt Nielsen told Forbes," In a market that's

shrinking, existing players will be pushing hard to gain market share and it will be

difficult to strengthen our position in that sector (Espinoza, 2009)"

In October 2009, B&O introduced BeoVision 10, a 40 inch LED television developed

according to the new strategy where company changed their idea from 'television

sculpture' to 'broadcast painting' for the living room. Because of the square design of

BeoVision 10, B&O can include more loudspeakers which provide better sound

quality then standard LCD televisions. Still, television market faces high competition

and pressure with fewer profit margins. B&O needs to continuously work on its

'magic' feeling which gives customers an unexpected features or functions.

Threats of New Entrant


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Threat of entry depends on the barriers present in the market. In the market B&O

operating is the luxury segment of audio and video products. Consumer in this market

expects premium quality innovative products from manufactures with brand name.

Barrier for enter in this market is high with high investment required in terms of both

product development and technology. However, company might face competition

from existing companies who is in the market of audio and video products like Sony,

Phillips, LG and Samsung etc. These companies focus on all segments of customers

and they can create new line of products which is especially for luxury segment

customers. But according to current market condition, none of the audio and video

companies want to take chances in terms of changing product lines; they prefer to

focus on new technology development instead of creating new lines of products. This

shows that, there is entry in barriers for existing companies in the market where B&O

operates.

Threats of Substitutes

Threat of substitutes exists when demand of product is affected by price change of

other substitute products. Product price elasticity is affected by substitutes products

available in the market, more substitutes makes demand more elastic because

consumers have more alternatives (Porter, 1998). A substitute for B&O audio and

video products is computing devices which include desktop computer, laptop,

palmtop and now tablet devices. Company started manufacturing audio solutions like

BeoSound 8 series, BeoPort, BeoPlayer for computers, iPods and other mp3 players

(Olufsen, 2011). This helps B&O to expand its product line and increase its market

share in increasing computing market.

In video products market, computers are the substitutes for televisions but we cannot

get the viewing experience which we get in televisions. Televisions and other video

products like blu-ray player are essential part in consumer lifestyle. B&O providing

home integration solution for its customers by BeoLink which offers integration of

video and audio system helps customers to get full utilisation of entertainment system

(Olufsen, 2011). B&O knows about these threats of substitutes and they are

developing products like home integration which gives customers a completely

different experience from its products.

Bargaining Powers of Customers

Bang & Olufsen divided its business activities in three different business areas which

include:

- B&O audio/ video business which develops and sells luxury audio/video

products in large number to luxury hotels, property projects and high income

group customers.

- B&O sales and development of sound systems for automotive industry.

- ICEpower, which manufacture, develops and sells compact digital amplifier

solutions to major companies.

Figure: Bang & Olufsen Business Areas


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Source: Bang & Olufse, Right issue 2009

Bang & Olufsen own large number of B1 and shop in shops which provides customer

a very different experience of Bang & Olufsen products. All staffs in shops are trained

by company. The bargaining power is low for B&O customers because there are only

few competitors in luxury audio/ video segment markets. B&O get the closet

competition from Bose and Leowe in this segment. However, the customers of this

segment hardly care about products comparison with other competitors, and they have

limited choice as well.

Business to Business:

B&O automotive sells luxury sound systems for high end car segment. These sound

systems are highly recognised in automotive industry. B&O collaborates with Audi

(Germany), sports-car manufacturer Aston Martin (UK) and Mercedes-AMG

(Germany). Company also newly signed contract with BMW to develop advance

sound system for a range of BMW vehicles (Karl Kristian Hvidt Nielsen, 2011). The

bargaining power is high in this segment because they buy products in bulk and have

long contract of orders.

Luxury hotel or hospitality segment also have bit high bargaining power because of

the quantity of orders they give to B&O.

It is concluded, bargaining power among private consumer is low but bargaining

power in business to business is high but not much due to limitation in choices.

Bargaining power of Supplier

Every manufacturing company depends on its suppliers for the supply for

components; none of the companies in consumer electronics market manufactures all

of its product components. That's why analysis of bargaining power of supplier is

necessary in strategic analysis. B&O currently have 220 suppliers in which 40 of

which account 90% of the total procurement budget (B&O, 2009). Bang and Olufsen

official announced that they entered into partnership with Intel, this corporation going


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to help B&O and Intel in sharing technology and ideas in both directions (Meagher,

2011). B&O is highly dependent on its supplier and some of company key suppliers

are also competitors for them in audio and video segment market. This is a risk for

B&O and over the time relationship become strong that it would be difficult to change

suppliers. B&O faces high bargaining power from supplier which is also a risk for the

company.

Internal analysis of Bang & Olufsen using Porter's Value Chain:

Internal environment analysis helps organisation to analyse their resources, so that

they can act accordingly with the changing external environment. It includes

organisation mission statement, culture, leadership style, functional areas, physical

facilities and personnel. Porter's Value chain is a strategic evaluation tool used for

distinguishing weaknesses and strengths in value adding processes (Audretsch, 1995).

According to Lynch (2003), Value chain is defined as the key link between values

adding activities and their interface with the support activities. The Value Chain of

ang and Olufsen has been demonstrated in the following diagram :

Porter's Value Chain

Appendix: Value Chain of Bang and Olufsen

Inbound

Logistics

Operations

Outbound

Logistics

Marketing

and Sales

Service


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Inbound Logistics

Include activities which are concerned with receiving, storing and distributing the

inputs, raw material or components to the product or service (Johnson & Scholes,

2005). B&O products are high quality and they need to maintain strategic cooperation

with its supplier for high quality components. Company wants to strengthen relations

with its suppliers so that they can get access to specialised and new technology. This

helps company to focus more on developing its core competences.

Design is another inbound logistics of B&O; they work with external designers which

helps company to develop remarkable design solutions of audio/video products with

cooperation with company internal designers or employees (Olufsen, 2009).

Operations

Transformation of inputs into the final product or service comes under operations.

B&O charge premium prices for its products because of their product design and

implementation of latest technology. B&O developed one standardised technology

digital platform for all of its products. Company had its own development centre

which is responsible for development of new products. Previously, company use too

develops separate technology for new products according to their design specification.

ICEpower is a Danish research and development company which develops business to

business solution for end producers. B&O purchase 100% shares in ICEpower in year

2008, which enables B&O to access new technology produced in ICEpower

(ICEpower,2010). This is an advantage for B&O over its competitors. ICEpower

R&D division helps in value creation of B&O products. R&D is the most important

part of B&O value chain because company is highly dependent on new innovative

products, any delay or wrong choice in technology development of successful product

with reliable quality and advance functions may adversely affect company turnover

and its business. New product launches contributes 25 percent of turnover which

reduced to 10-16 percent since 2007.


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Source: B&O, Right issue prospectus, 2009

With the advancement of new technologies, product life cycle among consumer is

reduced. B&O new strategy focuses on development of new product more quickly

and cost efficiently. In order to make production more cost effective, company needs

to outsource some of its production work to other countries where labour is skilled

and cheap like China or India.

Source: B&O, Right issue prospectus, 2009

Outbound Logistics

Collection, store and distribution of the product from company to customer comes

under outbound logistics (corporate strategy, page 137). B&O distribution centre

Herning, Denmark established in 2008 which is responsible for distribution of all

finished products to all of the markets and dealers (right issue prospectus). If company

create assembly centres in each region, then this will help B&O in reducing shipping

cost.

Marketing and Sales

Marketing and sales help business to reach its customers, and make customers aware

of the business product and services. Bang & Olufsen provides training programmes

for shop staffs, dealers, and technicians to strengthen sales and give the customers a

good experience of Bang & Olufsen (Olufsen, 2009). In November 2010, there were

687 B1-shops across the world against 690. B&O continues its intensified focus on

recruiting new shops and the share of turnover for B1-shops is 82 per cent and the

number of shop in shops is 277 (Karl Kristian Hvidt Nielsen, 2012). The world wide

sales support made good foundation for B&O to reach its customer as well as growth

in sales to a large extent.

Services

Services are those activities which enhances the value of the products or services

(Johnson & Scholes, 2005). Service plays an important role in value creation and

differentiates B&O from its competitors. B&O provides customised installation of

products with guidance and advice so that customer can get full benefit from new


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products from day one (B&O, 2011). B&O also offers business to business solution

for Interior Designers, Architects and branches of the hospitality industry by their

expertise in complete system integration. This service increases B&O reliability

among customers but side by side also creates extra cost for the company. Long life

service support helps customers but create problem for company in reserving

discontinued item parts.

Conclusion and Recommendation:

After analysing Porter's five forces, Value chain, Bang & olufsen director interim

reports and information of B&O from other electronic sources like Forbes, Reuter, I

concluded that 'Pole Position' strategy is on right track so far. which Bang and

Olufsen pre-tax profit in second quarter of 2011 is 36.4 million DKK versus their

forecasted profit of 16.8 million DKK. The key driver of this profit is automotive

segment which brings Bang & Olufsen back to profits contributed 17% as compare to

10% it the total turnover (Reuters, 2011).

However, at macro level, any downfall in world economy can cause problem for Bang

& Olufsen in terms of sales. Germany, UK and Denmark are the three biggest market

and B&O facing decline in markets of UK and Denmark due to 2008 recession,

economy of these companies affected badly which shrank the high end audio/video

markets. In order to overcome this problem they should expand and focus on other

markets like Asian markets which recorded increase of 15.3% in first half of 2009/10

(Karl Kristian Hvidt Nielsen, 2012).

According to Porter's Five Forces analysis, Band & Olufsen heavily dependent on its

suppliers and bargaining power of suppliers is very high, which is the big threat for

the company. Company should keep on working in strengthening the relation with its

strategic suppliers.

Since the product life cycle of consumer electronics reduced due to innovation of new

technologies, Bang & Olufsen should focus more on product development and in

building core competencies so that they can compete in consumer electronics market.

Finally, Bang & Olufsen management should make their 'Pole Position' strategy

flexible according to the changing market conditions. B&O need to focus on its

product portfolio in order to analyse their products performance. Automotive segment

is performing well which grew 90 percent in the second quarter of 2011 as compare to

audio/video business which recorded 7 percent growth. Automotive enterprise will

going to help B&O in building long term contracts with big brands like Mercedes,

Audi, Aston Martin and now BMW (mostly for 6 series and concept car) (Reuters,

2011).

Words count: 2700 (approx) excluding diagrams and references


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Olufsen 2011: http://www.bang-olufsen.com/about-us

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